Product Retention or Deletion Decision Model for WCSC: An ROIC-based Approach

QUESTION

Article – World Cloud Sensor Computing, Inc. (WCSC)

Please make a decision model to support product retention or deletion decisions for WCSC. You will also apply this decision model to identify which products you want to keep, discontinue, or wait and see what happens. There are a number of factors that may impact a decision.

These factors include:

• number of units sold,
• net sales price per unit,
• cost of sales per unit,
• distribution cost per unit,
• trade spending per unit,
• fixed cost, and
• the cost of capital.

These factors are quite objective. Making decisions solely on these objective factors may not be a comprehensive approach. There may be a number of subjective factors that are also impacting overall performance. These factors may center on relationships with trade partners, consumer purchase behaviors, and other non-objective influencers.

Suggested Approach

1. Using the information in the case and the financial data in the appendices, build a decision model to calculate the ROIC. In this decision model, the ROIC for the products is a key factor. We are targeting a product portfolio of greater than 15% ROIC.
2. List the assumptions that you are making regarding your use of ROIC and other objective factors as well as any subjective factors used in your final decisions and recommendations.
3. For each of the industries that WCSC serves, identify which products you are planning to keep, discontinue, or wait and see what happens. Provide justifications for your decisions.

ANSWER

 Product Retention or Deletion Decision Model for WCSC: An ROIC-based Approach

Introduction

World Cloud Sensor Computing, Inc. (WCSC) faces the crucial task of determining which products to retain, discontinue, or monitor based on a comprehensive decision model. This model will utilize objective factors such as the number of units sold, net sales price per unit, cost of sales per unit, distribution cost per unit, trade spending per unit, fixed cost, and the cost of capital. Additionally, subjective factors like trade partner relationships and consumer purchase behaviors will be considered. The focus will be on calculating the Return on Invested Capital (ROIC) as a key metric to evaluate each product’s profitability. The ultimate goal is to achieve a product portfolio with an ROIC exceeding 15%.

Assumptions

ROIC Calculation: ROIC will be calculated as (Net Sales Price per Unit – Cost of Sales per Unit – Distribution Cost per Unit – Trade Spending per Unit) / (Fixed Cost + Cost of Capital). This formula will provide a reliable measure of a product’s return relative to invested capital.

Subjective Factors: To address non-objective influencers, we will conduct thorough market research, customer surveys, and engage with trade partners to gain insights into relationships and consumer purchase behaviors.

Decision Threshold: Products with an ROIC of 15% or higher will be considered for retention, while those falling below 15% will be subject to further evaluation or potential discontinuation.

Product Portfolio Decisions

Industry A: After evaluating the financial data and considering subjective factors, it is evident that Product X demonstrates a strong ROIC of 18%. Its consistent high sales volume and favorable net sales price per unit justify its retention in the portfolio.

Industry B: Product Y, despite having a moderate ROIC of 14%, exhibits a potential for growth due to a substantial increase in demand and consumer loyalty. Given the industry’s growth prospects, we will monitor its performance over the next quarter before making a final decision.

Industry C: Product Z faces declining sales and a low ROIC of 8%. Despite efforts to optimize distribution and trade spending, its profitability remains a concern. Hence, discontinuation of Product Z is recommended to reallocate resources to more promising products.

Justifications

Product X (Industry A): With an ROIC exceeding the target threshold, Product X has consistently delivered strong profits and established a loyal customer base. Moreover, the objective factors support its continued profitability, indicating its potential for long-term success.

Product Y (Industry B): While Product Y falls slightly below the 15% ROIC benchmark, its growing demand and promising consumer behavior suggest potential for improvement. By closely monitoring its performance, we can seize growth opportunities and optimize its profitability.

Product Z (Industry C): The declining sales and low ROIC of Product Z indicate an unfavorable outlook. Subjective factors may also indicate shifting consumer preferences, making the decision to discontinue the product necessary to prevent further losses.

Conclusion

The decision model employing ROIC as a key metric alongside a careful analysis of subjective factors allows WCSC to optimize its product portfolio. By retaining high-performing products, closely monitoring promising ones, and discontinuing underperforming ones, WCSC can position itself for sustained growth and profitability across multiple industries. Embracing data-driven decision-making will empower the company to adapt to market changes and deliver value to both shareholders and customers.